State Of The Economy 2015

Racing ahead, slowly

Though market sentiment and the general business environment has improved, key concerns remain unaddressed

Exactly a year ago, the business sentiment across industrial clusters in the country was so depressing that not a single optimistic voice could be heard. Coupled with rising costs and shrinking margins, the uncertainty in the economic environment left many entrepreneurs worried about their collective future. Cut to 2015 and we are happy to report that the situation is much better. In their travels to nine industrial clusters across the country — Aurangabad and Chakan, Baddi, Kishangarh, Morbi, Naroda, Noida and Faridabad, Sriperumbudur, Tiruppur and Karur and Visakhapatnam — Outlook Business’ reporters found the general mood to be hopeful and, in some cases, clearly optimistic. Orders are materialising and there is willingness to make investments in what they think is a more stable environment.

Of the 106 people surveyed across the clusters, nearly half said that sales in FY15 were better than the preceding year; 29% said the situation was stable. Over 65% of respondents believe that the current fiscal will be a better year for business, with 60% saying they will be able to maintain profitability in this period; last year’s figures for both these questions stood at 59% and 53%, respectively.

While this optimism may have something to do with a mild improvement in demand and order book, there are some chronic concerns that can’t be wished away. Labour costs double nearly every five years and add to the list of rising costs. A whopping 91% of all respondents confirmed that labour costs have indeed gone up, with 58% saying that raw material costs have gone up as well.

 Problems aplenty

For the entrepreneur, the issue is not so much about paying more for labour as it is about their inability to get qualified manpower at that hiked price. This is an issue that is currently plaguing textile manufacturing units in Tiruppur, Tamil Nadu. A big base for garment exports in the past, Tiruppur seemed to have hit a rough patch. But today, money is pouring back in the form of exports thanks to problems in rival Bangladesh. The flip side of this surge in business is the lack of a skilled workforce that can fulfil the burgeoning orders. In Aurangabad and Chakan in Maharashtra, the paucity of labour is made worse by the political establishment making a fuss about migrant labour. Labourers from UP and Bihar have started fleeing the state because of the pressure and locals are just not able to fill their shoes. This problem is only set to get worse in the not-so-distant future, given that 91% of the respondents in that cluster said they are planning to hire more workers in the current fiscal. 

And it’s not just labour issues that have companies worried — connectivity is another bugbear. This is most obvious in Morbi, a base for the manufacture of ceramic tiles. Though Rajkot is just 66 km away, connectivity continues to be an issue; reaching Chandigarh from Baddi in Himachal Pradesh is equally painful. The marble and ceramic units in Morbi complained to our reporter about the pathetic quality of roads, which results in damaged goods in transit and costs them a pretty penny. That being said, most clusters are satisfied with the power supply they receive. For many years, inadequate and unreliable power supply played havoc with the fortunes of businesses across clusters. Entrepreneurs have — in the past — tried to resolve the issue by installing power backups and absorbing the additional cost. Today, barring a couple of clusters such as Baddi in Himachal Pradesh and Noida in the NCR, the supply of power is not of significant concern. Of course, that could just as well mean that many units have been operating below capacity. 

 Power up

In Visakhapatnam, Andhra Pradesh, where no electricity for two-three hours a day used to be the rule rather than the exception, this time, not one respondent spoke of power supply being a challenge. This has come as a blessing, especially for the construction sector, where even other costs — for instance, bitumen prices — have dropped. Sriperumbudur in Tamil Nadu is an interesting case, where the larger enterprises have continuous power (since that is a part of the deal they have struck with the government), while the smaller entities don’t have it easy. In the case of Naroda in Gujarat and Aurangabad in Maharashtra, the concern is really more about rising tariffs than about the availability of electricity. Of the 106 respondents, as many as 82 (77%) said power cuts weren’t affecting their business, while just four said it was leading to lower output. 

While several industries are hopeful of a better year, the glut in real estate is keeping allied industries on the edge. Kishangarh in Rajasthan imports at least four lakh tonne of raw stone for the production of marble — with over 70% of it accounted for by institutional sales — and a slowdown in real estate is the worst possible scenario for the cluster. There are no signs of change and firms here continue to keep the inventory cycle going even when money is not coming in, hoping that things will change. If the situation does not improve within the next 18 months, locals fear that several firms in the cluster might die a slow death. 

Cut to Aurangabad and Chakan, both well-established clusters for the automobile industry and its ancillary units. With the overall demand for passenger cars and commercial vehicles remaining muted, the original equipment manufacturers here are a harried lot. Capacity utilisation levels in Chakan have dropped and the only silver lining is that units have now focused their attention on quality improvement and are looking for ways to manage costs — ditto for Aurangabad. Business seems to be slightly better in other core industries, with inventory cycles improving significantly; overall, 55% of the respondents there say inventory has remained stable, while 9% say it has improved. But a third of the respondents maintain that the cost of credit has worsened. 

 Misguided optimism?

In many ways, the buoyancy in Tiruppur — where 67% of the respondents said the economic environment for their business was good — conceals the high levels of pessimism in other clusters. Even in Visakhapatnam, 33% of respondents were happy about the way their business was doing, with an equal proportion saying it was stable. However, centres such as Kishangarh, Chakan and Baddi didn’t see a single respondent say that business was good. Morbi fared slightly better, with two respondents replying in the affirmative. And if Tiruppur was still subject to the order drain to Bangladesh and China, the situation could have been completely different. Even in Visakhapatnam, the upbeat sentiment comes from a final decision on the bifurcation of the state and the feeling that business is finally returning to normal.

While the capex scene looks better than last year, across clusters, as many as 31% respondents said that the current economic environment was good, while another 42% said it was stable. Though this optimism may be driven by a sentiment shift because of a stable government at the centre and a slight uptick in exports, the hope is that by next year, it will translate to bigger investment decisions facilitated by significant policy changes. Perhaps then it will get easier for companies to actually Make in India.